In April, the USPTO released an Advance Notice of Proposed Rulemaking (ANPRM) that detailed a potentially sweeping revamp of Patent Trial and Appeal Board (PTAB) proceedings—seeking comments on rules that would codify certain discretionary denial practices under the NHK-Fintiv rule, exempt petitions from such denials if they meet a new “compelling merits” standard, and impose sweeping requirements with respect to party relationships and mandated disclosures, among other changes. The proposal has proven controversial across the spectrum. As reflected in some of the numerous comments submitted by the June 20 deadline—with over 760 comments available on the Federal Register—a large group of licensees and industry organizations, and even some licensors, have argued that certain aspects of the USPTO’s proposal overstep the boundaries set by the America Invents Act (AIA), while opinions of the agency’s other suggested changes vary widely. Here, RPX takes a deep dive into some of the most notable issues discussed in the submitted comments.

USPTO Director Kathi Vidal has clarified in public comments since the ANPRM’s release that the proposal is intended as more of a starting point, indicating that not every proposal contained in this notice of rulemaking will necessarily be reflected in the final rules. For instance, in a statement to IPWatchdog, she explained that the document reflects both the USPTO’s own proposals and those from stakeholders:

Some of these proposals are things we’re proposing, some came from the public that we want to hear responses on—we’re not necessarily going to move forward on every single thing or in exactly the way it’s articulated. So now is the chance for the public to comment at a high level, conceptually, and the next round of comments are going to be on the rules as drafted.

The issue came up again during an April 27 hearing in which members of the US House IP Subcommittee questioned Vidal over the finality, or lack thereof, of the draft rules package. In an exchange with Rep. Zoe Lofgren (D-CA), Vidal explained that her “understanding is those are not our proposed rules, those are basically winnowing down our options and the feedback we previously received so we can get stakeholder feedback as we shape the rules, and the rules will be in a notice of proposed rulemaking”. Rep. Lofgren expressed “surprise that the PTO that is publishing the proposed rules is now saying it’s not their proposed rules”, remarking that the use of an ANPRM was “very odd”.

However, one of the most significant debates since the ANPRM’s proposal—as reflected at that hearing, and in comments submitted in response—was over a key threshold issue: whether the agency has the authority to implement some of its most ambitious changes in the first place, given the structures already set in place by the AIA.

Discretionary Denials in Light of Parallel Litigation

One focal point of that disagreement over statutory authority has been the proposed codification of one of the NHK-Fintiv rule’s most controversial provisions: the one that has allowed the PTAB to discretionarily deny institution when a district court’s scheduled trial date in litigation over the same patent is likely to precede the deadline for the Board’s final written decision. In the ANPRM, the USPTO has proposed in part to codify this practice, specifying that the determination about district court trial timing would be based on median time-to-trial statistics for the district in question as well as factors including the judge’s caseload and the “availability of other case dispositions”. Alternatively, the USPTO has proposed a new exception under which an IPR would not be discretionarily denied based on a parallel district court proceeding if it is filed within six months of the service of the district court complaint. Rather than supplanting the one-year statutory bar, this would “instead merely offer an incentive for a petitioner to proceed promptly with any IPR petition”.

Rep. Lofgren argued that these proposals, especially the six-month exception, violate the AIA—in particular, the aforementioned time-bar provision (35 USC § 315(b)) establishing that district court defendants have one year from the date they are served with a complaint to file an IPR: “The USPTO’s proposal to shorten the 315(b) deadline clearly contradicts the text of the AIA and could create the very problems that Congress sought to avoid by enacting the AIA”.

A variety of commenters have agreed with Lofgren that the USPTO would exceed its authority by codifying these rules. For instance, Cisco, Juniper Networks, and NetApp underscored in a jointly filed comment that under Section 315(b), a “petition is timely if filed within one year of the date the petitioner, real party in interest [(RPI)], or privy is served with a patent infringement complaint . . . The Office’s proposed rule is entirely inconsistent with Congress’s one-year deadline for filing a petition after being sued for infringement”. The three companies further note that “Congress has already spoken on the circumstances in which parallel district court litigation forecloses IPR proceedings”, citing restrictions on institution where a petitioner or its real party-in-interest has already filed a civil action challenging the patent from Section 315(a).

Another commenter, Amazon, tied its substantive objections on this proposal to broader policy concerns, critiquing the time-to-trial rule as undermining one of the key aspects of Congressional intent behind the PTAB: to ensure that validity is adjudicated by subject matter experts, based on the “understanding that lay jurists may be ill equipped to reliably and accurately address the difficult scientific and technical questions that often arise in patent validity disputes”. “The USPTO proposes to make district court adjudications preclusive of PTAB review if it can be shown that a court would in a median case be faster than the PTAB. Thus, Congress’s desire for technical questions to be answered by technical experts is ignored if a court beats the PTAB statutory schedule by a few months”.

The “Compelling Merits” Standard

An even greater focus among the submitted comments was the ANPRM’s proposed “compelling merits” standard, which essentially provides an exception to the NHK-Fintiv rule. As first detailed in a guidance that the USPTO released in June 2022, and as reiterated in the new proposal, this exception provides that “when a challenge presents compelling merits the proceeding will be allowed to proceed at the Board even where the petition would otherwise potentially be a candidate for discretionary denial”. A petition presents “‘compelling merits’ when the evidence of record before the Board at the institution stage is highly likely to lead to a conclusion that one or more claims are unpatentable by a preponderance of the evidence”. The petitioner would have the burden to present evidence that leaves the PTAB with “a firm belief or conviction that it is highly likely that the petitioner would prevail with respect to at least one challenged claim”. Compelling merits is a higher standard than the “reasonable likelihood” one required for institution generally, the USPTO explained, and is also higher than the “preponderance of the evidence standard (more likely than not) that applies to final determinations of patentability at the close of trial”.

Criticism of this proposed standard came from multiple sides of the broader NHK-Fintiv debate. Much of the criticism from licensees argues that requiring that a petition show “compelling merits” to overcome discretionary denials effectively overrides the lower “reasonable likelihood” standard for institution provided in Section 314(a), and thus violates the AIA. For instance, HP Enterprise (HPE) asserts that the standard “inappropriately rewrites the standard set forth by Congress”, with similar arguments raised by Cisco, Juniper, and NetApp as well as IBM (comments here). Red Hat, an independent subsidiary of IBM, additionally remarked that while it supports “a carve-out provision to create standing even when the other proposed requirements are not met”, the compelling merits standard is also “not appropriate” because it even establishes a higher threshold than what is required at the final written decision stage (preponderance of the evidence). Amazon, for its part, characteries the compelling merits test as “first and foremost . . . an attempt to rewrite the § 103 obviousness test” wherein “only the strongest cases—ones that amount to nearly an anticipation—would be allowed to go forward, regardless of whether the claims would have been obvious under U.S. Supreme Court and Federal Circuit jurisprudence”.

Also raising concerns about the compelling merits standard was Nokia (comments here), which expressed support for certain other proposed reforms from the ANPRM in the context of its activities as both a licensor and licensee. Nokia stated its concern that “compelling merits” will become the rule and not the exception. Also problematic was the fact that this standard “injects a highly subjective test, a test that is presumably not appealable, as an exception to proposals that otherwise strive to be objective and/or bright line rules”—thereby undercutting the “certainty” offered by other ANPRM proposals.

Even some firms engaged in patent assertion—most of which were generally otherwise supportive of the ANPRM—had issues with the compelling merits test. For instance, monetization firm Empire IP LLC—in a document written in the first person though unsigned, albeit with metadata indicating that its author was principal Timothy Salmon—argued that every petitioner is likely to assert “compelling merits”, leading to “wasteful” litigation on that issue. Empire further argued that the test adds an additional layer atop the statutory “reasonable likelihood” standard that is hard to “evaluate” and is likely to be “arbitrary”, and raised concerns that the test will result in conflicting outcomes (e.g., if a district court issues a claim construction order while an IPR is pending). Publicly traded InterDigital, Inc. (comments here) also opposed the compelling merits standard due to its poorly understood nature, and the lack of “consistency or predictability” caused by its vagueness. “Furthermore, permitting the merits of a petition to trump all of the other factors potentially weighing against institution—such as finality, burdens, and potential gamesmanship—does not comport with the goals of the AIA or the USPTO’s mission”, it asserted.

IP advocacy groups also joined the fray. The Council for Innovation Promotion (C4IP) (comments here), an organization led in part by former USPTO Directors Andrei Iancu and David Kappos and former Federal Circuit Judges Paul Michel and Kathleen O’Malley, agreed that the compelling merits test likely violates the AIA, especially since it is likely to become the de facto standard at institution. C4IP further warned that the test could result in pre-judging petitions on the merits, particularly since the same panel of three Administrative Patent Judges (APJs) preside over the “whole proceeding”; and because, it contends, the test gives too much discretion to APJs, who can rely on compelling merits when there is otherwise no other reason for discretionary denial. Judge Michel also wrote a comment of his own that in part touched on compelling merits, opining that due to the potential for the test to become the “effective standard for institution”, this would “effectively nullify[] Fintiv”, which he argues “has been beneficial”. Additionally, the High Tech Inventors Alliance (comments here) argues that the standard improperly overrides the statutorily prescribed standards for institution and final written decisions.

Standing, “Substantial Relationship” Test, and “For-Profit” Petitioners

Another area of focus for commenters were provisions related to standing—i.e., what types of entities may and may not file PTAB petitions—based on an expanded view of corporate relationships and certain exceptions concerning business models. In particular, the ANPRM proposes to adopt an overarching “substantial relationship” test that folds in currently applicable factors concerning real parties-in-interest, privies, estoppel, and joinder as well as certain other considerations. Among those additional considerations would be to treat parties that are “involved in a membership organization, where the organization files IPRs or PGRs, as having a substantial relationship with the organization”. Here, the USPTO explained that “[t]here may be instances in which entities may pool their resources to challenge a patent. For example, where multiple entities are defending infringement claims in district court litigation, or have related interests in challenging the patentability of patent claims, they may join together to file a single challenge to the subject patent claims before the PTAB”.

Under the resulting proposal, discretionary denial would be allowed for any petition filed by “for-profit, non-competitive entities that in essence seek to shield the actual real parties in interest and privies from statutory estoppel provisions”; those that have not been sued or threatened with suit “in a manner sufficient to give rise to declaratory judgment standing”; those that are not practicing in the field of the challenged patent with products of its own; and does not otherwise have a “substantial relationship” with certain other entities.

Licensees again argued that these standards contravene the AIA. Broadly, some—including Amazon, Roku, and Snap—pointed out that the AIA includes no standing requirements apart from limiting AIA review to anyone but the patent owner. Indeed, Amazon notes that the law’s legislative history shows that Congress considered but rejected a standing requirement.

A variety of licenses further contend that since Section 315(e)(1) limits PTAB estoppel to real parties-in-interest and privies of the petitioner, the “substantial relationship” test violates the AIA by potentially encompassing far more types of relationships. Amazon, for its part, argues that this test “casts a net much wider than real parties in interest and parties in privity, and includes at least litigation co-defendants and parties that are in a supplier-customer relationship”. Apple (comments here) states that since the USPTO “offers no clear criteria to determine what constitutes a ‘substantial relationship’”, this “lack of clarity could lead to gamesmanship and unfair outcomes”. Per Red Hat, this requirement would be “likely to increase patentees’ incentive to game the system by bringing assertions against the least-resourced potential targets, with the goal of ‘working up the chain’ of potential targets and seeking to reduce the options that later demand recipients have to try to defend themselves”. By thus encouraging petitioners to bring their AIA reviews, Ciena (comments here) argues, “[t]his proposal is akin to a ‘first to file’ system for AIA patent challenges that Congress did not create”. HPE, for its part, observes that it is problematic to treat parties that are sued over same patent as substantially related—pointing out that such parties are not necessarily coordinating defenses or patentability challenges, nor do wish to do so.

Perhaps not surprisingly, Empire IP and InterDigital were more supportive of the substantial relationship test. Empire urged the USPTO to define the term to include entities that “are party or entitled to benefit from a joint defense agreement”, with InterDigital similarly recommending that the test include “those involved in a membership organization, where the organization files IPRs or [post-grant reviews (PGRs)]”. DivX, LLC (f/k/a DivX CF Holdings LLC) (comments here) was slightly more circumspect, agreeing with the USPTO that current party relationship concepts may be insufficient, the real problem is inadequate enforcement of existing RPI requirements in the context of membership organizations.

Among those weighing in on the USPTO’s proposed rules regarding “for-profit” petitioners and membership organizations was Unified Patents (comments here), which is currently engaged in litigation before the PTAB over whether certain of its member companies must be named as RPIs in its IPRs. Unified argues that the “for-profit” test violates the AIA because it improperly “circumvent[s] Congress’s express decision to allow anyone other than the patent owner to file challenges”. It also contends that the underlying policy goals stated in the ANPRM on this issue are based on the “flawed premise that filings by independent third parties is a categorical problem”—countering that “third-party filers, like any other filer, serve an important purpose in deterring exploitation of overbroad patents”. To the extent that abuse occurs, Unified points out that the PTAB has tools at its disposal, including sanctions, to deter such misconduct (as Vidal sought to do in the OpenSky Industries and Patent Quality Assurance IPRs). Licensees weighing in on this issue argued that such membership organizations have a deterrent effect; Ciena, for instance, remarks that the for-profit restriction “would inevitably lead to an increase in meritless patent infringement assertions against” it. In contrast, Ericsson expressed support for barring petitions from “certain for-profit, non-competitive petitioners”, while Nokia argued in favor of a “rule that requires a petitioner, or the real party in interest or privy of the petitioner, to have been sued on the challenged patent or have been threatened with infringement of the challenged patent in a manner sufficient to give rise to declaratory judgment standing”.

Mandated Funding Disclosures Debated by Industry Organizations

Another proposal introduced in the ANPRM would require the disclosure of information on corporate control and funding, broadly similar to the rules imposed last April, with some ongoing pushback, by Delaware Chief Judge Colm F. Connolly. That proposal would:

. . . requir[e] a patent owner and petitioner to disclose anyone with an ownership interest in the patent owner or petitioner, any government funding related to the patent, any third-party litigation funding support (including funding for some or all of the patent owner’s or petitioner’s attorney fees or expenses before the PTAB or district court), and any stake any party has in the outcome of the AIA proceeding or any parallel proceedings on the challenged claims.

Such requirements would possibly serve as a precondition for requesting discretionary denial. The disclosure of third-party or government funding would also potentially be required to take advantage of proposed exemptions that would insulate small businesses from AIA review altogether—possibly, by allowing the PTAB to inquire into “inquire into all ownership interests”—to prevent entities with such outside backing from “using this section to attempt to insulate their patents” from review.

One of the most notable comments on this proposal came from the International Legal Finance Association (ILFA), which has previously advocated against such rules in the context of district court litigation (including, e.g., for one such rule ultimately imposed in New Jersey) and did so here. The ILFA argued that these sweeping new disclosure rules depart too far from the “stated goal of post-grant proceedings”—namely, “to establish a more efficient and streamlined patent system that will improve patent quality and limit unnecessary and counterproductive litigation costs”. The limited scope of IPR is not intended “to provide an open forum for petitioners to conduct discovery untethered and unrelated to narrow patentability determinations”, it explained. Moreover, the ILFA warned that the proposed requirement would risk “disclosing materials that courts have repeatedly afforded work-product protection”—specifically, financing agreements themselves as well as “communications and documents exchanged among litigants and the legal finance provider”. The “[d]isclosure of funding agreements, unrelated parties, or affiliated parties is not relevant to the PTAB adjudicating the objective merits of patentability challenges”, the ILFA contended.

In contrast, the US Chamber of Commerce, which has repeatedly called for increased transparency into litigation funding through its Institute for Legal Reform (ILR), filed comments in which it endorsed the requirement that third-party funding be disclosed in PTAB proceedings. Echoing its prior filings in other proceedings (for instance, a brief it filed in a dispute over transparency and disclosure before Delaware Chief Judge Colm F. Connolly), the Chamber argued that such information is required to help avoid conflicts of interest, “given that some funders are publicly traded, and those that are not may be comprised of complicated networks of owners and entities”. Additionally, the Chamber further asserted that such disclosure is needed to “effectuate the real-party-in-interest requirement for post-grant proceedings” and prevent a district court defendant that filed a failed petition from then bankrolling a petition by a codefendant. It also observed that the “disclosure of third-party funding sheds light on who or what entity is driving the post-grant proceedings and whether the review is being employed for a potentially improper purpose” like the rent-seeking behavior employed by third-party petitioner OpenSky. Another issue that the Chamber has previously raised, and did so again here, was the need to uncover the extent to which foreign governments are involved in litigation, as PTAB proceedings “allow for limited discovery and could potentially be exploited by foreign actors for the purpose of acquiring highly sensitive intellectual property information”.

Also weighing in on this issue was C4IP, which criticized the USPTO’s apparent need to determine whether petitioners have a business model that does not promote innovation through this proposed requirement. It also argues that mandating such disclosures would be “particularly troubling considering the lack of nexus to the merits of a post-grant proceeding”, and that the requirement would violate the AIA, “which provides no indication that it intended a patent owner requirement to disclose anything about its identity (beyond possessing title to the patent) or sources of funds”.

For further background and details about the ANPRM, see “USPTO Proposes Formal Revamp of PTAB’s Discretionary Denial Practices” (April 2023).